The University of Waterloo announced on March 10, 2020 the development of a tool to help the capital markets incorporate physical climate change and extreme weather risk into investment decisions.

Researchers at Waterloo’s Intact Centre on Climate Adaptation developed a climate risk framework which will help institutional managers to guide investments, securities commissions to assess disclosure, and credit rating agencies to measure risk by incorporating the impacts of climate change into business analysis.

“Climate change is irreversible, impacting every aspect of our lives, including the capital markets,” said Blair Feltmate, professor at Waterloo and head of the Intact Centre who authored the report, entitled “Factoring Climate Risk into Financial Valuation.”

The report describes the “Climate Risk Matrix,” which is designed to identify the most impactful climate change related impacts, specific to industry sectors. Incentive to write the report came from the Task Force on Climate-Related Financial Disclosures and Canada’s Expert Panel on Sustainable Finance. As suggested by the expert panel’s chair, Tiff Macklem, the matrix “provides a solid and practical way to assess and value physical climate risks.”

Financial support for the report was provided by the Global Risk Institute (GRI), Scotiabank and Intact Financial Corporation. The 32-page report presents climate risk matrices for the commercial real estate sector and the transmission and distribution of electricity. It also identifies that the next sectors best suited for climate risk matrix development are as follows: materials, energy, utilities, industrials and real estate.

“We now have a framework that uses climate-related data with existing valuation models to determine a company’s climate change risk exposure in financial terms,” said Sonia Baxendale, president and CEO of the GRI. “The outputs from this framework will be invaluable to regulators and investors by filling in data gaps that are crucial for effectively assessing risk.”

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“Climate change and extreme weather risks can represent challenges for capital markets,” said Brian Porter, president and CEO at Scotiabank. “This report provides practical guidance that will help the financial sector to better incorporate climate risk into financial valuation.”

Mark Carney, Governor of the Bank of England and special envoy on Climate Action and Finance to the United Nations, warned that climate disclosure must become comprehensive, climate risk management must be transformed, and sustainable investing must go mainstream. These climate risk matrices offer a practical and readily deployable means to act on Carney’s warning.

In terms of next steps, the report advises the following:

“The next step to create Climate Risk Matrices requires major institutional investors reaching out to subject matter experts, who would be most easily accessed and assembled into working groups through industry associations – by combining the skill sets of investors and subject matter experts (neither can succeed alone), the scaled production of Climate Risk Matrices, across sectors, can begin. Sectors best positioned for Climate Risk Matrix development, based on self-reported and readily available climate change data, are Materials, Energy, Utilities, Industrials and Real Estate.”

To read the complete report, click here.

Featured image by Arturo Castaneyra, @castaneyra: Toronto’s Financial District.


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